Modern Threads (India) Ltd. v. Commissioner Of Income-Tax

1. On an application under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question for our opinion:

“Whether on a proper interpretation of the provisions of section 37(2A) read with Explanation 2 of the Income-tax Act, 1961, the Tribunal was justified in disallowing Rs. 19,918 being cost of gift articles by treating the same as entertainment expenses?”

2. The relevant assessment year is 1984–85. During the course of assessment, the Assessing Officer noticed that the assessee has incurred expenses on distribution of suit lengths.

3. The Assessing Officer has invoked the provisions of section 37(2A) read with Explanation 2 of the Income-tax Act, 1961, and disallowed Rs. 19,918 on the ground that the distribution of suit lengths to various persons is nothing but entertainment expenses. In appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) has confirmed the view taken by the Assessing Officer. In appeal before the Tribunal, the Tribunal has also confirmed the view taken by the Commissioner of Income-tax (Appeals) holding that in view of Explanation 2 to section 37(2A), the distribution of suit lengths to various persons is nothing but expenses on entertainment.

4. On a reference, heard learned counsel for the parties. Mr. Kasliwal submits that the distribution of suit lengths is for the purpose of the business and in view of the provisions of section 37(1) of the Act, it should not be disallowed. Mr. Singhi, learned counsel for the Revenue, submits that in view of Explanation 2 to section 37(2A) of the Act, it is nothing but an entertainment and the Tribunal has rightly disallowed this amount on entertainment.

5. The provisions of section 37(1) provide that if any expenses are incurred for the purpose of earning income and for profits and gains of the business or profession that expenditure should be allowed. But sub-section (2A) of section 37 starts with a non obstante clause and provides that notwithstanding anything contained in sub-section (1) or sub-section (2), no allowance shall be made in respect of so much of the expenditure which is in the nature of entertainment expenditure which is in excess of the aggregate amount computed in this sub-section. Explanation 2 to sub-section (2A) further provides and clarifies the doubts that entertainment expenditure includes expenditure on provision of hospitality of every kind by the assessee to any person whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade.

6. The words “hospitality of every kind” by the assessee to any person includes every type of expenditure on entertainment. If the assessee distributes the suit lengths that cannot be taken out from the nature of entertainment expenses. Though it may be for the business, once the provision is there such type of expenses cannot be allowed. As stated earlier sub-section (2A) starts with a non obstante clause and Explanation 2 to section 37(2A) includes every type of expenses, therefore, in our view, there is nothing wrong in the order of the Tribunal and this type of expenditure is hit by the Explanation 2 to sub-section (2A) of section 37 of the Act.

7. In the result, we answer the question in the affirmative, i.e, in favour of the Revenue and against the assessee.

8. The reference, so made, is disposed of accordingly.